This is fascinating and really makes a lot of sense. I've been trying to focus on my larger financial plan, but I find myself obsessed with learning about how we got to where we are.
Carl Richards
· 9 months ago
There seems to be a lot of introspection right now. Wondering how we got here and if we shoul have (or could have) seen it sooner.
The problem with recognizing that there was no way to see it coming (before the fact) is that it makes you wonder if there is anyway to avoid repeating it.
Really interesting questions...
Dylan
· 9 months ago
Carl, truly awesome post!
Kent @ Financial Philosopher
· 9 months ago
Carl,
I appreciate your illuminating explanation of heuristics -- something I believe more people should be aware of...
Self-awareness and self-knowledge are key ingredients to success in any endeavor and our brain's use of heuristics, for better or worse, is fundamental to our decision making process.
As you stated, heuristics worked quite well for primitive man. The human brain, however, has not significantly changed in 100,000 years but our environment certainly has dramatically evolved.
Complicating matters for modern man is the incredible amount of external distractions and overwhelming number of choices available for every decision.
If one takes a moment to think about it, the saber-toothed tiger is much less frightening than the environment we live in today.
"Thought is the organizing factor in man: intersected between the 'causal' primary instincts and the resulting actions." -Albert Einstein
"In character, in manner, in style, in all things, the supreme excellence is simplicity." ~ Henry Wadsworth Longfellow
Byron Woodson
· 9 months ago
I'm almost thinking you're comparing apples and oranges.
When we select stuff out of our closet, we've already bought the clothes and put them there so we know what we've got. We even have a background of knowledge of what clothes go on what body parts and what 'matches'. But when my fiancee asks me to suggest something to wear, i'm stupefied because there's so many options that i'm overwhelmed by the choices.
I think the new investor (under 5 years) is faced with the same kind of situation that i face when i have to choose clothes for my fiancee: an experience of overwhelm. If you're new to the market, i tell everyone to get a spider (S&P index for those not in the know) and sit on that for a few years. It literally takes years to know how to interpret trends and pick stocks, just like it takes years for little boys to pick out their own clothes (see numerous pictures of little boys wearing superman underwear over their jammies with pirate hats and bunnie slippers)
two notes: 1. Representativeness has failed miserably, ask Nicholas Taleb. 2. I'm also waiting for your general description of the process of financial planning.
Carl Richards
· 9 months ago
Byron-
I think we are on the same page. Human's have a created heuristic tricks for dealing with the complexity we face.
One of the tricks is representativeness (using the recent past, looking for a pattern, and projecting it forward).
It may have it place in the world, but when it comes to investing representativeness has failed us. It does not work to assume that the recent past is going to continue.
Buy SPY is a great idea. Buying SPY in January 2000 with money we borrowed against our home because we think it is going to continue to go up because thats what it did last year is a BAD idea. Selling SPY now, for the sole reason that it has gone down in the recent past is another bad idea.
Please keep reminding me that you want to hear about planning, I will get to it soon.
All Comments
got here and if we shoul have (or could have) seen it sooner.
The problem with recognizing that there was no way to see it coming
(before the fact) is that it makes you wonder if there is anyway to
avoid repeating it.
Really interesting questions...
I appreciate your illuminating explanation of heuristics -- something I believe more people should be aware of...
Self-awareness and self-knowledge are key ingredients to success in any endeavor and our brain's use of heuristics, for better or worse, is fundamental to our decision making process.
As you stated, heuristics worked quite well for primitive man. The human brain, however, has not significantly changed in 100,000 years but our environment certainly has dramatically evolved.
Complicating matters for modern man is the incredible amount of external distractions and overwhelming number of choices available for every decision.
If one takes a moment to think about it, the saber-toothed tiger is much less frightening than the environment we live in today.
"Thought is the organizing factor in man: intersected between the 'causal' primary instincts and the resulting actions." -Albert Einstein
"In character, in manner, in style, in all things, the supreme excellence is simplicity." ~ Henry Wadsworth Longfellow
When we select stuff out of our closet, we've already bought the clothes and put them there so we know what we've got. We even have a background of knowledge of what clothes go on what body parts and what 'matches'. But when my fiancee asks me to suggest something to wear, i'm stupefied because there's so many options that i'm overwhelmed by the choices.
I think the new investor (under 5 years) is faced with the same kind of situation that i face when i have to choose clothes for my fiancee: an experience of overwhelm. If you're new to the market, i tell everyone to get a spider (S&P index for those not in the know) and sit on that for a few years. It literally takes years to know how to interpret trends and pick stocks, just like it takes years for little boys to pick out their own clothes (see numerous pictures of little boys wearing superman underwear over their jammies with pirate hats and bunnie slippers)
two notes:
1. Representativeness has failed miserably, ask Nicholas Taleb.
2. I'm also waiting for your general description of the process of financial planning.
I think we are on the same page. Human's have a created heuristic tricks for dealing with the complexity we face.
One of the tricks is representativeness (using the recent past, looking for a pattern, and projecting it forward).
It may have it place in the world, but when it comes to investing representativeness has failed us. It does not work to assume that the recent past is going to continue.
Buy SPY is a great idea. Buying SPY in January 2000 with money we borrowed against our home because we think it is going to continue to go up because thats what it did last year is a BAD idea. Selling SPY now, for the sole reason that it has gone down in the recent past is another bad idea.
Please keep reminding me that you want to hear about planning, I will get to it soon.